What is the Fisher equation?
The Fisher equation calculates the real interest rate from nominal rates and inflation. It shows your investment's actual purchasing power return.
What's the difference between nominal and real interest rates?
Nominal rates don't account for inflation, while real rates do. A 5% nominal rate with 2% inflation equals roughly a 3% real rate.
When should I use the exact vs approximation formula?
Use the exact formula for accuracy, especially with high rates. The approximation works well for rates below 10% but becomes less accurate at higher values.
Can the real interest rate be negative?
Yes. When inflation exceeds the nominal rate, the real rate becomes negative, meaning purchasing power decreases despite earning interest.
Why do I need to know the real interest rate?
Understanding real rates helps evaluate true investment returns, compare loans fairly, and determine whether savings preserve purchasing power.